Court Wins Set Important Precedent for Paperless Mortgages

Two recent court rulings affirmed that lenders can enforce electronically signed and transferred notes, laying important groundwork for wider adoption of electronic mortgage technology that could improve the customer experience for borrowers and save lenders and servicers a bundle.

In separate foreclosure cases in New York and Florida, judges ruled that the electronic transfer histories of loans originated with e-signatures proved the plaintiffs had standing to foreclose. This should help put to rest many of the concerns held by investors about buying loans secured with e-notes, and suggests further clarity may have to come from case law.

"The regulators in this area have been reticent," said Margo Tank, a financial services attorney and partner with BuckleySandler LLP who specializes in electronic signatures. "The courts are going to be leaders in the electronic records and signatures space. It should give a lot of comfort to the mortgage industry."

At stake is lenders' willingness and ability to leverage paperless mortgages to slash manufacturing costs and loan production cycles at a time of rising origination costs and complex regulatory compliance challenges that can only be accomplished through automation — not to mention growing borrower demand for a tech-infused mortgage experience that the Consumer Financial Protection Bureau is eager to bring to bear with electronic closings.

While more than 1,000 e-signed mortgages have gone into foreclosure since the paperless transactions became legal in 2000, 30% of lenders still cite legal acceptance as one of the two biggest challenges to implementing e-signatures, according to a recent survey conducted by National Mortgage News. Customer acceptance was cited as a primary challenge by 26% of respondents, while security was identified as a top concern by 21% of lenders.

In the New York case, a state court of appeals overturned a lower court decision regarding a loan currently held by New York Community Bank. The bank is seeking to foreclose on a loan to a Brooklyn, N.Y., woman that was originated by the now-failed AmTrust Bank and involved an e-signature.

The decision laid out the transfer history of the loan from AmTrust to NYCB through the Federal Deposit Insurance Corp. and established that an e-note is a "transferable record" under U.S. code.

"The transfer history, together with the copy of the e-note itself, were sufficient 'to review the terms of the transferable record and to establish the identity of the person [or entity] having control of the transferable record,'" the court wrote in its April 13 decision.

"This evidence was sufficient to establish the plaintiff's standing as the holder of the e-note and rendered the lack of proof of valid assignment irrelevant," the ruling continued.

Another case decided in April, this time in a Florida state appeals court, similarly upheld an e-note for a mortgage serviced by Wells Fargo. In that case, the court found that Wells Fargo provided "competent, substantial evidence that Fannie Mae owned the e-note and authorized the bank to pursue the foreclosure."

With these two decisions, many doubts circling e-notes can be laid to rest, making the mortgages they pertain to more palatable to secondary market investors, and hence to originators.

"Customers in the mortgage industry and companies have been comfortable on the e-disclosure side but less comfortable with the e-note side," Tank said. "What we hear all the time is, 'We can make the e-note, but what if we want to sell?' The transfer history was sufficient along with the e-note to meet the statutory standard. This will help loan origination and concerns that investors may have."

Prior to these decisions, e-signatures and e-notes existed "in a desert," according to Chris Christensen, an attorney at Dallas law firm PiersonPatterson. It was not specifically clear how existing laws pertaining to mortgages would apply to them. Importantly, the decisions applied existing law and legal precedent related to paper documents to the question of e-signatures, and found in the mortgage industry's favor.

And while the decisions occurred at the state level, they still can act as a guide post for judges in other jurisdictions in how they should approach these matters.

"There's always an inherent risk in litigation that a court will get it wrong and it will get replicated everywhere," Christensen said. "We have the beacon for other judges to steer to about how we want e-sign applied."

The timing of the decision is also particularly fortuitous as the mortgage industry starts to digitize through innovations like Quicken Loans' Rocket Mortgage, according to Allison Schoenthal, a New York-based attorney with the law firm Hogan Lovells.

"Standing is the hot topic in foreclosures," Schoenthal said. "It's refreshing to see an appellate decision on something that's relatively new to the industry."